In a long-anticipated development, on March 6, 2024, the SEC adopted final rules requiring climate-related disclosures.  The rules add:

• • Non-financial disclosures about climate-related risks, how such risks are managed and related board oversight;

• • Scope 1 and Scope 2 greenhouse gas (GHG) emission disclosures along with phased-in attestation requirements for large-accelerated and accelerated filers;

• • Financial statement disclosures about “capitalized costs, expenditures expensed, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds”;

• • Disclosures about carbon offsets and renewable energy credits or certificates (RECs) if material; and

• • Information about the impact on the estimates and assumptions used to produce the financialstatements from risks and uncertainties associated with severe weather events and other natural conditions and other related issues, if material.

To help companies and advisors implement these new requirements, PLI’s SEC Institute will offer several programs.

We will present two One-Hour Briefings delving into the final rules at 1 p.m. and 3 p.m. on April 18, 2024.  The first briefing will focus on governance related disclosures and the second briefing will focus on GHG emission and financial statement disclosures.  We will put links to the briefings in this blog as soon as they are available.

Our Midyear Forums will include in-depth discussion of the details of the rules.

We will also have a special conference in the early fall focused on understanding and implementing these extensive new disclosures.  We will put a link to this conference in this blog as soon as it is available.

You can read more in the related Fact Sheet and the Final Rule Release.

As always, your thoughts and comments are welcome.

On February 5, 2024, SEC Chief Accountant Dr. Paul Munter issued a Statement titled “An Investor Protection Call for a Commitment to Professional Skepticism and Audit Quality.”  The Statement reminds auditors and audit committees that their ultimate responsibility is to investors.

In the introduction to the Statement Dr. Munter notes that the PCAOB inspection process has found an increase in audit deficiencies over the last several years:

“The Public Company Accounting Oversight Board (“PCAOB”) reported a troubling increase in deficiency rates found in its recent inspections.  In its 2022 inspections of audits performed in 2021, the PCAOB inspections program found that insufficient audit evidence was obtained to support the auditor’s opinion in 40% of inspected audits. In its 2021 inspections, this same deficiency rate was 34%, up from 29% in its 2020 inspections. This is a troubling trendline in PCAOB inspections results.”

He then goes on to state:

“While we believe strongly that most auditors are talented professionals, dedicated to performing high-quality audits, the issues and trends identified in PCAOB inspections in recent years demand the attention and renewed commitment of the entire profession to deliver on its mission of protecting investors.”

The Statement then focuses on two principal areas:

Management’s Role and Auditors’ Exercise of Professional Skepticism in Response to Changing Conditions 

After a discussion focused on several audit issues, including frequent inspection findings and the importance of professional skepticism, the Statement emphasizes that audits are not like other business services:

“Applying professional skepticism can sometimes come at a cost, whether it is budget overruns, conflicts with management, or pressure from within the audit firm to maintain client relationships. But the audit engagement is not a standard business relationship between service provider and client, with profit as the primary goal and indicator of success. Instead, as the Supreme Court recognized, the auditor’s ultimate responsibility is to the investing public.”

The Importance of the Audit Committee in Prioritizing and Promoting Audit Quality

In this section of the Statement Dr. Munter focuses on important aspects of audit committee oversight of the audit process:

“Academic studies highlight the risk that, in some cases, in executing their mandate, audit committees may look to protect the interests of the issuer and its management over the interests of investors.  This risk can arise out of an audit committee’s association or coziness with the issuer or its management or through management’s influence over the audit committee’s supervision of the auditor. We remind audit committees of their role as critical gatekeepers for investor protection through oversight of a high-quality audit and the benefit of having an audit committee that is independent of management.”

As always, your thoughts and comments are welcome.